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Strategic Foresight
We cannot plan the way we used to plan before, as a company and as an individual. This course is about challenging mental models and how they lead to decision making. We don't use logic but emotion to this end. It is about combining logic and emotion. The characteristic of long-lived companies Is globalization dead? Capital and trade are less international than before 2007. Capital is down from 20% to 5% and trade from 27% to 20%. The only thing that increased overwhelmingly is DATA. Globalization is overestimated. Only 20% of products are exported. 3% of people lived outside of their home country. The 4th industrial revolution 1st industrial Revolution: Steam engine 2st Industrial Revolution: Steel, oil, and electricity 3rd Industrial Revolution: Personal computer and internet 4th Industrial Revolution: AI, IoT, blockchain, etc. How do you position yourself in an environment where the disruption comes from the outside? If you do not adapt to your new environment, you are going, with a knife, to a gunfight. The clock sped is accelerating, driven by digital. You have to look at what is coming at you. You have to play really close to the ball. Once you are a big company, publicly trade, you cannot just harvest the business and leave. You must keep the company going. If not, your shareholders are going to kick you out of the seat. Should you even go public? Why do companies fail? Fortune 500 companies are companies that fit their contemporary environment. When you have a revolution product on hand, are you willing to challenge your own business model? (Kodak) If the signals are there, you should abandon it. The pitfalls of great companies: *Corporate arrogance and complacency. *Insufficient attention to weak signals. *Lack of vision and risk-taking. *Trapped in yesterday's business model. *Biases for internal decision processes. *Wrong incentive: short term & risk-averse, could be driven by market expectation. So what do long-lived companies have in common? *Shared value *Beyond profit *Peripheral vision *Experimental mindset (at the edge of their market) *Financially conservative Strategic foresight framework Strategic Space Purpose is vision (Specific enough to give a direction but vague enough to allow initiative), mission (why you are in business), and value. Environment & Opportunity is close to a SWOT analysis. We need to understand our environment to be able to make decisions. Strategic option (Choice) Exogenous - Endogenous uncertainty-concerns. Launching an incremental product, like Golf 6 to Golf 7, is a proactive change. iPhone was a game-changer. A lot of uncertainty from the company and from the market. Robust change gives you money but the rest gives you options for the future. You need a balanced portfolio. Game changers are rare and expensive, you have a first-mover advantage. If you have a robust design, you should prefer certainty, you have no choice. If you are flexible, you should go for uncertainty as it offers options. You should adapt your valuation to your risk. DTA is used to determine the value of R&D. ROV give you the value of flexibility (you need flexibility and exogenous variability) Acid test Can you pull it off? You can use the acid test to know if you should do it or not. Scenarios versus forecast Mental model and influence A mental model is the way we perceive and treat information. They can influence the decisions you make. Mental models create biases that tend to make you internally oriented. You only focus on your issues. You do not understand the world around you. Forecasts are mainly based on assumptions and past trends. True Ambiguity: huge impact, low probability, can only be explained with insight. (Fukushima for example). In that case, the only thing left to do is contingency planning. With better understanding, and better knowledge you can move true ambiguity to a range of futures and therefore use scenarios. Contextual global Scenarios Back to the Strategy space framework, Environment and opportunity could be replaced by Scenario. Scenarios help you make sense of what is happening in the world. They do not involve decision making but help the decision-maker do the right call. Scenarios are divergent, consistent from time period to time period and systematic (multiple causes create multiple effects). they are about exogenous factors, possibilities that are outside the control of the company. We cannot apply scenarios to the unthinkable, the wild cards. We apply scenarios to foreseeable events like a global financial and economic crisis. 7-Steps Integrated Process To identify issues, we use the STEP (Social, Technological, Economic, Environmental, Political) model based on a 2 axis scale: the degree of uncertainty and the degree of impact. Giving your strategic options, you need to find the right type of indicators, what need for you to be true. The subtility is between leading and lagging indicators. Scenarios are based on a central question: it should be relevant given the challenge, starts with "how could", cannot be answered by "yes" or "no", and has a relevant time horizon. We do not put any probability in scenarios. The idea is not to foresee what is most likely and prepare for that. The idea is to get the full picture of any possible outcome and have a plan for all of them. Team building Scenario building is a team-based effort. We have a core team, internal extended network, and an external extended network. At Shell, the core team is composed of 12 people, full time: 1 team leader, political & economic expert, expert for different product lines The internal extended network is composed of 80ish local experts The external extended network is made of around 200 experts. Practical example The high-level question How could the future world Architecture (The system of relationships and interventions) develop towards 2030? This question gives you the 3000m view of the topic and a time horizon. The time horizon needs to be long enough for scenarios to be divergent, to give you options, but short enough to stay relevant. Identification of issue: The STEEP Within the context of the central question and the time horizon of the scenarios, list the different issues possible using the STEEP framework. Issue prioritization Put all the issues on 2 axis framework: Degree of impact and degre e of uncertainty. What is important is not the exact position but the box they fall in. Arriving at focal questions The goal here is to identify connexion. We group issues that logically go together and label the groups into themes to form axes or focal questions. In our example, we use "Global environment" and "Resources". Then we label the 2 extremes of the axis. For GE, antagonistic or collaborative; for resources, ample or constrained. Not that we have different scenarios, are they divergent? Strategy matrix Using the exo/endo framework, we place the product portfolio. Robust is robust in all scenarios. How do you resolve endogenous uncertainty? You have to invest first and try to reduce endogenous. It tends to reduce over time. You make the decision before you know what is going to happen. Exogenous uncertainty tends to increase over time. In that case, the investment is made after the uncertainty is resolved. You make the decision once the event occurs and once you know what is true. How do you decide where to put your resources is based on the full strategic space framework and the Acid Test ROV, DTA and DCF explanation You need a burning platform but also an opportunity. If there is not opportunity just harvest the business.